The KOSPI ended the fourth week of July at 6,690.62, down 1.91% from the previous week, failing to hold the 7,000 line. Although the decline narrowed from the prior two weeks, the index fell for a fourth consecutive week, dropping 21.07% so far this month.
Across both the KOSPI and KOSDAQ markets, a "sidecar" — a temporary suspension of program buy and sell orders — was triggered for 10 straight trading sessions, pushing investor fatigue to an extreme. This week's Sunday Money Cafe examines the oil, interest rate, and supply-demand shocks that weighed on the market, along with the single-stock leverage products cited as amplifiers of volatility.
Oil at $100, U.S. Treasury Yields at 4.7% — Large-Caps Plunge
According to the Korea Exchange on the 26th, the KOSPI has now weakened for a fourth consecutive week, following declines in the first week of July (-4.58%), second week (-9.85%), and third week (-6.46%). On the 24th, the last trading day of the fourth week, sell-side sidecars were triggered simultaneously in both the securities market and the KOSDAQ market. So far this year, the KOSPI sidecar has been triggered 41 times and the KOSDAQ 25 times. Since the 10th of this month, a sidecar has been activated in one of the two markets every day over 10 trading sessions, excluding the Constitution Day holiday and weekends.
The moves are attributed to heightened risk aversion as instability in the Middle East reignited. After Houthi rebels announced they had launched airstrikes on two Saudi Arabian oil tankers, September Brent crude jumped 7.04% in a single day on the 24th to $100.69. The surge in oil prices revived concerns over inflation and a further increase in the U.S. base rate, pushing the 10-year U.S. Treasury yield above 4.70% for the first time in a year and six months.
Foreign investors net-bought 5.5720 trillion won in the securities market during the first four trading days of the week, but sold off 3.2827 trillion won on the 24th alone. Institutions also net-sold 2.7992 trillion won over the week. Individuals managed to net-buy only 459.9 billion won and were net sellers for three consecutive trading days during the week.
Semiconductor stocks, which carry a large weighting in the securities market, stood at the center of the market plunge. Samsung Electronics fell 10.73% over the week, breaking below the 250,000 won line, while SK hynix plunged 15.51%, giving up the 1.76 million won line. Kia (-10.00%), Hyundai Motor (-7.60%), LG Electronics (-12.78%), and DB HiTek (-17.22%) also declined sharply. By contrast, Samsung Biologics (9.76%), Naver (9.44%), Hanwha Ocean (7.20%), and Hanwha Aerospace (5.38%) rose, continuing the divergence across sectors.
"Lock Up 30 Million Won in Cash" — Market Contraction Unavoidable
The plunge in Samsung Electronics and SK hynix widened losses in single-stock leverage products that track the two stocks. The 14 products, which started at a listing price of 20,000 won, have fallen to between 10,635 won and 13,015 won, posting losses of 34.93% to 46.83% versus their listing prices. With "Samsung-nix" accounting for more than half of the KOSPI's market capitalization, critics point out that the launch of leverage products drew in trading value and intensified the concentration. As the trading of underlying assets and derivatives to match returns grew, a "wag the dog" phenomenon emerged in which the tail of exchange-traded funds (ETFs) shook the entire index, the argument goes.
Financial Supervisory Service Governor Lee Chan-jin said last month, "I regret that I should have laid down and blocked (the introduction of the system)." At a Cabinet meeting on the 21st of this month, President Lee Jae-myung ordered officials to "boldly take necessary response measures swiftly." In response, the Financial Services Commission moved up its measure to strengthen the base deposit requirement, which had been set for phased implementation next month, to the 31st. Accordingly, to make new investments or additional purchases in single-stock leverage products, investors must maintain a deposit of 30 million won in cash only. Substitute securities such as stocks, ETFs, and bonds are not recognized. Proceeds from selling securities are also counted as a base deposit only on T+2, when settlement is complete and actual cash is deposited.
Observers in the asset management industry suggest the measure could raise the barrier to entry for retail investors. An official at one asset manager explained, "It's the concept of tying up 30 million won in cash, like a jeonse (a Korean lease system requiring a large lump-sum deposit instead of monthly rent) deposit, just to buy stocks." The official added, "If you deposit 30 million won and invest the same amount, the product exposure is 60 million won, but for the entire account it effectively amounts to only 1x leverage." This means new entries and additional purchases by small investors could fall sharply, shrinking the market. However, there is also a counterargument that it is difficult to single out single-stock leverage as the sole culprit behind the volatility. The point is that it is hard to conclude that the volatility of domestic stocks is unusually severe compared with overseas semiconductor companies.
The abrupt schedule acceleration is also spilling over into a computing burden for securities firms. Firms that fail to complete their IT development within the deadline will be restricted from handling new transactions. An official at one securities firm said, "If the development isn't done, it's basically telling us not to do business, so we have no choice but to meet the schedule even if it means working overtime." Smaller and mid-sized securities firms complain that it is difficult to secure sufficient testing time. Some also criticize that strengthening the liquidity provider (LP) tracking-error management obligation (from 3% to 2%) is a measure that manages the result rather than the cause of sharp price swings.
The Financial Services Commission is also considering moving up — ahead of the originally planned November date — measures to strengthen tracking-error management and raise the trading unit for single-stock products to 20 shares, starting on the 19th of next month. While strengthening the cash deposit requirement may have some effect in curbing speculative demand, there are concerns that it could excessively lower accessibility for small investors and increase the IT burden on smaller and mid-sized securities firms. As a result, how much trading value and retail flows actually decline after the 31st, and whether market volatility subsides, are expected to become the key issues in gauging the effectiveness of the measures. Investors, too, need to fully verify the changes in trading conditions and product structures following the regulation's implementation before making investments.
